Business turnaround: the art and science of cost cutting

Business turnaround: the art and science of cost cutting

Successful businesses never rest easy. Instead, they’re constantly seeking out new ways to evolve their corporate model and strategy to maintain a competitive advantage.

Unfortunately, not all companies have this same ‘constructive dissatisfaction’ mentality. Many become complacent, a catalyst to financial decline and eventually crisis. It’s a tough reality, but, with smart intervention and cost cutting, business turnaround is possible.

Turnaround upturns

Advances in distressed business expertise and the emergence of specialised debt, means business turnaround is now easier to achieve.

In addition, under Australia’s recent Safe Harbour legislation, directors can now trade on despite questionable solvency. There’s no personal liability so long as a remedial course of action is being taken; administration is no longer the only option.

Fight for survival

When the going gets tough, businesses must act fast to get themselves out of financial trouble. Just like a doctor in an emergency room, they need to quickly assess the damage and implement a survival plan.

A turnaround plan should consist of seven key elements:

  • Stakeholder management
  • Crisis stabilisation
  • New leadership
  • Strategic focus
  • Critical process improvement
  • Organisational change
  • Financial restructuring

First steps in cost cutting

Cost cutting is a key strategy to turnaround. It firstly falls under crisis stabilisation, where the top priority is to make immediate improvements to cash flow. Critical process improvement should also generate cost cuts through process efficiencies.

For cash flow, an analysis of the working capital of business is paramount. From this, quick, easy, business and industry specific actions can be taken. This includes postponing large capital expenditure, renegotiating creditor payment terms and realising surplus or obsolete stock.

Administrative cutbacks

Administration is often a hot bed of costs savings. Success often boils down to multiple smaller cut backs, rather than a single significant one.

  • Unnecessary extras: start with discretionary expenditure. Any non-essential luxuries or activities, such as Christmas parties or conference junkets, should be cut. Combine other events.
  • Staff consolidation: next, weed out underperformers and less than busy staff, making terminations or consolidating jobs where possible. Handle any human cutbacks with care.
  • Management streamlining: now it’s management’s turn. Smarter supervision practices and removing layers of mid-level execs can work wonders. Give staff the responsibilities and focus on core department deliverables.
  • Discretionary spending: take it away. Given a budget of $20,000 for office consumables, you can guarantee it will be spent, whether needed or not.
  • Department restructuring: look at workloads and priorities and cut back on repetitive or defunct tasks. Engage in cross-department communication to identify gaps and overlaps.

Critical process redesign

During the critical process improvement stage, businesses must look at redesigning their processes. How can reductions in business requirements and manual processing be made? Where can efficiency and productivity improvements be developed?

Tactics include:

  • Investigating divestment opportunities to sell unprofitable businesses within a group.
  • Reassessing vertical and horizontal integration of supply chains.
  • Refocusing product and marketing, for example deleting product lines or changing up the sales mix.

The path to solvency

While crucial, cost-cutting strategies should only be one part of a bigger plan. To secure financial revival, businesses should seek assistance from a professional, reputable turnaround expert.

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